Should You Buy Overdraft Protection?

Are you tempted by overdraft protection (or "courtesy pay" or a similar nobly named service) for your bank or credit union account? It doesn't save you from bounced-check fees, but if you use a debit card at a store or ATM and accidently overdraw, the bank will cover the transaction. That saves you the nuisance of having your card turned down.

For that service, however, you pay—and you pay. The median fee for over-debiting, even by just a few dollars, is $35, according to "Overdrawn," a 2014 study by the Pew Charitable Trusts. If you don't cover the overdraft fast, fees can pile up to $90 or more, Pew says. You could be hit with two or three such fees in a single shopping afternoon. The lender collects the money from your next deposit, even if it's a Social Security check.

It's a profitable game. The report "Broken Banking" from the Center for Responsible Lending (CRL) in Durham, N.C., estimates that the industry earned $17 billion from overdraft and bounced-check fees in 2015.

Older people are less likely to make mistakes than the young. Still, in the 30 months ending in June 2012, the federal Consumer Financial Protection Bureau (CFPB) found that nearly 28 percent of bank-account holders ages 46 to 61 paid overdraft fees, as did 15 percent of those 62 and up. More than half of the people charged fees didn't even realize they were in the overdraft program, says Joy Hackenbracht, a research officer with Pew.

My advice

Find out if you've mistakenly opted into the overdraft program. If so, cancel it. Some 68 percent of overdrafters say they'd rather have a transaction refused than pay a fee. The CFPB found that overdrafters who left the program in 2010 saw their total fees, including those for bounced checks, drop by 45 percent over the following six months. You're especially vulnerable to accidentally accepting protection when you open a new account and have a lot of forms to sign, says CRL senior policy counsel Rebecca Borné.

Consider other options if you still want overdraft protection. Many banks will let you link your checking account to a savings account. If you overdraw, the bank will move money from savings to checking, perhaps for a $10 fee. If you have no savings, you could link to a credit card or perhaps to a personal credit line the bank offers. The cost of the credit line will be lower than the overdraft fee, Borné says.

Don't sign up for automatic bill payments if your checking account tends to approach zero every month. Pay only after you know that your Social Security or other checks have been deposited and credited to your account. The best way to avoid fees is to never overdraw.

Jane Bryant Quinn is a personal finance expert and author of How to Make Your Money Last. She writes regularly for the Bulletin.